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What are blue chips

And why they are popular with investors

If you are new to the stock market and don’t know where to start, blue chips can be a good investment option.

On the stock market, this is the name given to stocks of well-known companies with a long history, which are steadily growing and often pay generous dividends. The name “blue chips” comes from poker – they are used for the biggest bets.

Blue chips also have high liquidity – they have high intraday trading volume, which means that shares can be sold quickly. But let’s take it one step at a time: let’s consider the criteria for selecting blue chips and what kind of interest they are for investors.

The difference between blue chips and other stocks

More often than not, an investor can identify a blue chip by three characteristics.

Large capitalization. Capitalization is the number of all outstanding shares of a company multiplied by their price. In other words, the market value of the company.

In the U.S. market, blue-chip companies have historically been considered companies whose capitalization exceeds $10 billion. But smaller companies, if they are flagships in their industry, can also be counted as such. For example, Alcoa has a capitalization of about $5 billion, but it is often mentioned among the blue chips because it is a leader in the mining and production of bauxite, alumina and aluminum.

Liquidity. Blue chips are also the most liquid securities. In other words, they are of great interest to traders and investors, including large funds. Therefore, there is a large volume of trading on such securities.

Stable dividends. Because blue chips are often old, established companies in their segment, they have already gone through a phase of growth and active market expansion. Therefore, such companies tend to generously share their earnings with shareholders. Thus they are often dividend stocks, not growth stocks. That is why blue chips are often talked about in terms of their stable dividend policy. For example, all companies in the dividend aristocrat index can automatically be considered blue chips.

Dividend Aristocrats

These are companies that have been consistently paying and increasing dividends for more than 25 years.

There are three additional criteria that such companies must meet:

  1. Presence in the S&P 500 Index.
  2. Capitalization of $3 billion or more.
  3. The average daily trading volume on the paper of 5 billion dollars.

The list of dividend aristocrats is tracked by the SPDAUDP index, which has about 60 companies. Among the index’s long-livers are such companies as 3M, Coca-Cola, Colgate-Palmolive, Johnson & Johnson and Procter & Gamble.

How to find blue chips

Blue chips are stocks of the oldest and largest companies on the market. It is easy enough to find them on any skimmer site, such as FinViz. To do this, you need to set a filter for the size of the company – from $10 billion.

In addition, we can set the criteria of dividend yield – above zero, as well as the date of IPO, i.e. the date of listing on the stock exchange – over 20 years. As a result, we will get a selection of the largest and oldest companies that pay dividends.

The “Finviz” screener allows you to filter companies by capitalization, IPO date and dividends

Advantages and disadvantages

Let’s look at the pros and cons of adding blue chips to a portfolio from the perspective of a long-term investor. Let’s start with the advantages.

Reliability. The risk of issuer bankruptcy is very low. After all, these are companies on the go, with an established business model and a high credit rating, which allows them to easily refinance their debts.

In addition, companies like this are systemically important to the state. The tax deductions coming into the budget from the largest domestic companies are of great importance for the federal budget and the country’s GDP.

Dividend stability. As already noted, most blue chips bring stable dividends. Their dividend yield may not be exorbitant, but it is not the size of the payout that matters most to shareholders, but its stability. This allows large funds to plan cash flow and build a long-term strategy.

In the American market, dividend payers are grouped into special indices:

  1. Dividend Achievers are companies that have been consistently paying and raising dividends for at least 10 years. An example of a fund that tracks this index is the Invesco Dividend Achievers ETF (PFM).
  2. Dividend Aristocrats are dividend aristocrats that have been paying dividends for over 25 years. The ETF for this index is ProShares S&P 500 Dividend Aristocrats (NOBL).
  3. Dividend Kings are dividend kings. These companies have been making payments for more than 50 years. Such companies include, for example, tobacco holding company Altria and American retailer Lowe’s. An up-to-date list of Dividend Kings can be downloaded from the Suredividend website.

The total is about 260 foreign companies that can be considered blue chips and reliable dividend payers.

The volatility of blue chips is generally lower. First, since the issuer is large, the price of the paper is less dependent on the speculative moods of players – it is harder to manipulate the quotations. Second, these are often stable dividend payers, which means their price is less capricious than that of growing mid- and small-cap companies. Lower volatility is one of the main advantages of blue chips over second- and third-tier stocks.

The disadvantages are partly derived from the advantages.

Low upside potential. The share price is unlikely to increase manyfold. These companies are already large, and their products have already occupied their niche. If such a company grows, it grows linearly. The exceptions among blue chips are growth stocks from technology sectors, such as Facebook or Yandex.

Dividends are often lower than in second-tier stocks. Some blue-chip stocks are growth stocks; they do not pay dividends. For example, seven of the 20 largest U.S. companies do not pay dividends.

Top 20 U.S. companies by capitalization. Seven of them do not pay dividends. Source: FinWeeks

The main properties of blue chips

High liquidity. Blue chips have a high free float – the so-called free float. Therefore, they are considered an excellent tool for trading between companies as well as between individuals. Such shares can be bought and sold at any time when the exchange is open. This distinguishes them from low-liquidity stocks and low-rated corporate high-yield bonds, for which there may be no buyer or seller in the stock market.

Narrow Spread. The spread is the difference between the buy price and the sell price of an asset. The spread is a measure of supply and demand for an asset.

The narrow spread is also a consequence of high liquidity. There are a lot of buyers and sellers – the stock is in demand: they are ready to buy it from you with a minimal difference in price. Traders also have strategies based on spread trading – a narrow spread forces them to make more trades in these very securities.

Popularity. Blue chips are part of many stock indexes. The latter allow large investment funds to form portfolios for their clients with different contents, profitability and risk profiles.

Large funds buy stocks in large volumes and rebalance their portfolios periodically. This leads to large capital flows in the blue chips.

To find out in which indices this or that blue chip is present, you can use the “Investing-Com” website. To do this, in the profile of the selected company, go to “Overview” – “Indexes Component”.

Profitability of blue chips

Blue chips are considered the most reliable of all stock categories, with a dividend yield higher than bond yields and bank deposit rates. It is possible to find companies with stable and transparent dividend policy.

Dividend stability index

The DSI index shows how regularly the company pays dividends and increases their size. The indicator is historical, i.e. it does not include risks of future changes in dividend policy.

The closer DSI is to one, the better: it shows that dividends have been paid and increased for seven years in a row. This means that there is a high probability that this trend will continue. If the DSI is between 0.3 and 0.6, then the company does not pay dividends regularly.

This index can be used by investors as one of the criteria for selecting securities in the dividend portfolio.

Yield of blue chip index

201815,5%
201931,8%
Q1 2020−20,5%

List of blue chips

Blue chips are often included in stock indexes and are the main driving force behind them – the Dow Jones in the United States, the Nikkei in Japan, the FTSE 100 in Europe.

Such indices serve as important indicators of the state of economies, individual sectors and industries. Therefore, it is easy to get a list of blue chips by looking at the contents of these indices. Let’s take a closer look at how to find blue chips in indices of different countries.

U.S. blue chips. In the U.S. stock market, blue chips are represented by companies that have a very long history. For example, JPMorgan Chase was founded in 1799 and the pharmaceutical company Pfizer in 1849.

The number of American blue chips is in the hundreds, and they are well known around the world. Here are just a few of them: 3M (MMM), Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), McDonald’s (MCD), Verizon (VZ).

Japan’s blue chips. Tokyo is the third largest stock exchange in the world. It was founded in 1878, and now shares of more than 2,300 Asian companies with a total capitalization of $5.6 trillion are traded on it.

Most Japanese blue chips are in technology and finance, but auto and telecom giants are also among them. The Tokyo Stock Exchange has its own website, where companies are not searched by tickers, but by numerical codes, for example Softbank – 94340, and Honda Motor – 72670.

You can also see a list of the largest Japanese companies by looking at the basket of the MSCI Japan Index.

Top 10 blue chips from the MSCI Japan Index

The companyCapitalization, $ billionWeight in the index, %Sector
Toyota Motor Corp.142,363,68Secondhand Goods
Sony Corp.117,363,04Secondhand Goods
Softbank Group Corp.109,312,83Communication services
Keyence Corp.93,222,41IT
Nintendo Co.63,601,65Communication services
Daiichi Sankyo Co.60,281,56Health Care
Shin-Etsu Chemical Co.58,201,51Raw Material
Nidec Corp.57,061,48Industrial
Takeda Pharmaceutical56,611,46Health Care
Daikin Industries56,541,46Industrial

Source: MSCI JapanPDF Index, 125 KB

China’s blue chips. There are many companies with state participation and monopolies in certain sectors of the economy.

You can get a list of blue chips by looking at the composition of the Shanghai Stock Exchange SSE 50 Index.

Top 10 Chinese blue chips from SSE 50 Index

TitleCapitalization $ billionWeight in the index, %Economic sector
Kweichow Moutai Co. 419,8213,13Consumer Goods
Ping An Insurance (Group) Company of China Ltd235,8211,82Financial
China Merchants Bank Co Ltd187,7377,95Financial
Jiangsu Hengrui Medicine Co Ltd.90,465,15Health Care
Industrial Bank72,884,15Financial
Inner Mongolia Yili Industrial Group Co Ltd43,843,56Consumer Goods
China Tourism Group Duty Free Corporation Limited84,463,43Consumer Goods
Longi Green Energy Technology Co Ltd.59,643,39Industrial
CITIC Securities Co Ltd61,793,23Financial
Sany Heavy Industry Co Ltd.57,453,09Industrial

Source: csindex.com

Europe’s blue chips. The largest European companies are traditionally traded on the London Stock Exchange. It was founded in 1801 and is one of the four oldest exchanges – after Amsterdam, Philadelphia and New York. You can get a list of European blue chips by looking at the structure of the MSCI Europe Index.

Top 10 blue chips in Europe from the MSCI Europe Index

The companyCountryCapitalization, $ billionWeight in the index, %Sector
NestleSwitzerland332,613,53Essential Goods
Roche Holding GenussSwitzerland232,082,46Health Care
NovartisSwitzerland201,782,14Health Care
Asml HldgNetherlands185,261,97IT
Unilever Plc (Gb)UK160,451,70Essential Goods
LVMH Moet HennessyFrance160,451,70Secondhand Goods
AstraZenecaUK136,741,45Health Care
SAPGermany127,381,35IT
Novo Nordisk BDenmark116,141,23Health Care
SanofiFrance114,551,22Health Care

How to buy blue chips

As part of the funds. The easiest way to invest in blue-chips without having access to a particular country’s exchange is to buy ETFs on popular indices.

Most of these funds are traded for $, but some brokers allow you to buy them for dollars and euros.

Blue chips are also found in sectoral and industry-specific BPIFs, such as metals, telecommunications and finance. It is also possible to assemble your own set of blue chips, for example, by buying them in the same proportions as they are represented in the blue chip index. That way you can save on the management fee that funds charge. But you will have to rebalance your portfolio yourself so that the shares of the issuers match the sample.

Individually.

To buy more exotic companies, such as those from the UK, Japan and Canada, you will need qualified investor status or access through your broker.

Summary

  1. Blue chips – shares of companies with large market capitalization, usually from 10 billion dollars.
  2. The main properties of blue chips – reliability, low volatility, liquidity, narrow spreads.
  3. Often blue chips are old companies with a name that have been paying dividends for years. For example, all dividend aristocrats are automatically considered blue chips. Such companies are great for the dividend portion of a portfolio.
  4. Blue chips are present in most countries and are included in major indices. Therefore, they serve as an indicator of the state of the economy, sector or industry.
  5. Blue chips can be bought both individually and as part of ETFs.
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